Based on the table above, your monthly interest-only payment will be $8,. If you opt to make principal payments with interest, it will cost $8 , per month. By the end of the 2-year term, you must make a balloon payment of $793, to pay down your mortgage.
Financing Preferred by House Flippers
Hard money loans have become a common financing option for house flippers who cannot access commercial loans from banks. This may be due to a low credit rating and a history of substantial debt. In other instances, a real estate deal may not pass strict guidelines from a traditional lender. For these reasons, house flippers turn to hard money loans.
House flippers are real estate investors who buy property to fix and sell for a higher profit. They need enough cash to fully fund a deal. Otherwise, their offer to purchase property won’t be competitive. Once they purchase a house, they renovate it until it is ready for sale. This usually takes a couple of months to a year, making it ideal for short-term financing.
Once they are able to make a sale, they can pay back the loan. On the other hand, if a house flipper defaults, the hard money lender can foreclose or take ownership of the property. They can also sell it profitably in the market. However the deal turns out, it can still be a profitable outcome for the lender.
Borrowers who have a hard time securing a traditional commercial loan may take hard money financing. But before you sign any deal, you should weigh in the benefits and drawbacks of taking this type of loan.
Know the Advantages
First, let’s rundown its advantages. Many borrowers are drawn by the quick approval and financing time. If you need fast capital within a limited period, this is a viable recourse. A commercial loan from a bank can take over 3 months to get approved. Meanwhile a hard money loan can get approved and funded in 7 to 14 days.
Hard money lenders also allow you to leverage other people’s funds. This means you can potentially fund more than one real estate deal at once. Meanwhile, banks will not allow you to do this. If you’re confident about funding multiple commercial loans, you should consider hard money financing.
Next, it can give you the flexibility you need when it comes to payments. Lenders may allow you to change your payment schedule even within a short term. This is something borrowers cannot do with banks or credit unions. In other cases, when it comes to experienced house flippers, lenders allow the interest to accrue. A house flipper can pay the interest along with the remaining balance until the term is through.
Hard money lenders may also not be as critical with repayment. This is the case if your lender finds a good opportunity to make profits from your property. They may gain more income by selling the property on their own.
Beware of the Drawbacks
Despite fast financing, consider its disadvantages. Higher interest rates is a major drawback for hard money loans. This can be 4 to 10 percentage points higher than traditional commercial mortgages. The high interest rate also translates to higher monthly payments. Overall, it costs more than traditional commercial loans.
The short term also gives you less time to generate income. You are pressured to come up with a large sum of money to cover the balloon payment at the end of the loan. If you cannot pay the remaining balance on time, you should refinance to a traditional commercial mortgage to restructure your payments. Refinancing will extend your payment term and help lower your current interest rate.